Business Transitional Planning: Best Practices

If you asked 10 seasoned owners of privately-held businesses to identify their greatest business concerns, you would likely hear Business Transition or Exit planning. The majority of business owners 50 and older struggle with the fundamental questions regarding their long term relationship with their business. For example:

1. What is the best approach for succession keep, sell, gift, or some combination for me, my family and employees?
2. How and when should the transition of my ownership and ultimately control occur and to whom?
3. Who is best suited to assist me in this process and what role do my current advisors play relative to outside expertise?

Recognizing that business transitional planning needs to be done is a far cry different than knowing how to do it. Understanding what not to do is half the battle. Aside from not planning at all, the most dangerous error is presuming that a contingency plan (i.e. buy/sell or shareholders agreement), is a Transition Plan. In general, a contingency plan outlines what occurs in the event of the owners unexpected death. A Living Transition Plan alternatively provides the roadmap for the planned disengagement of the owner in a financially secure and methodical manner to the successor ownership and management.

When devising this transition plan, be careful not to overlook the obvious. Since the net worth of many business owners is largely comprised of their ownership, the transition plan must take into account their financial requirements relative to those of the business. Sophisticated financial models are critical to first analyze the financial capabilities and needs of the company relative to the owners personal cash flow requirements. It is this interrelationship assuming limitations in capital that makes corporate and personal financial modeling a fundamental requirement in crafting a sustainable living transition plan.

Also keep in mind that businesses do not operate in a vacuum; therefore a transition strategy shouldnt either. One must identify the complement of related factors that are integral to augmenting a successful transition. These include reviewing the successors capabilities and passions, the business environment, family roles and relationships, as well as the corporate governance structure. The interests and roles of the other key stakeholders also need to be examined and incorporated into the planning effort (e.g. business partners, key employees, lenders, suppliers, customers, and other trusted advisors). Advance coordination among these related components provides an increased likelihood of a successful post-transition result.

As with most things in life, proactive planning is critical to the development and successful implementation of a living transition plan. Procrastination is not the business owners friend. A transition plan should be in place and implementation underway approximately three to five years before the targeted exit date. Preparing the business and successors requires time and forethought as it relates to implementing both the financial elements and the operational transitional components. When a company is in the growth stage, capital investment is the priority. When the owner is planning to transition from the business, however, increased business and personal cash flows to secure the owner’s capital base may be the higher priority. Alternatively, in advance of an external transition, the business owner can benefit by strategically operating and capitalizing the business to increase reportable earnings to ultimately maximize stock values. Finally, advance operational succession planning requires time and specific steps to adequately prepare successor management and/or leadership for their new roles.

Then there are the “eyes wide open” factors. One is the application of objectivity to avoid emotionally based decisions. The prime example is allowing blood rather than talent to drive the decision about the future ownership and management of a company. This is where a board of directors and/or a trusted and experienced advisor can be worth their weight in gold.

Successful managers do not necessarily make successful owners or leaders. Experienced advisors can help to decide whether or not the successor possesses the necessary skills and capabilities to own and operate the business. That decision needs to be made early on in the planning process so that expectations are managed in a positive manner. Otherwise, the owner may turn a positive into a negative by creating unrealistic expectations of family members or key employees before determining if the proposed plan meets both the personal and business objectives.

Finally, the living transition plan is only as good as its execution. The plan must be measured regularly against its goals and benchmarks so that adjustments can be made periodically. An important interrelated element of executing a plan is being certain it meets the needs of all stakeholders because their continued loyalty and support is crucial to the long term success of the business and its transition.

Donald Bielen, Principal of The Rainier Group, a Regional consultancy that has helped more than 800 privately held companies across the U.S. implement Lifetime Transition and Succession plans over the past 22 years. The Rainier Group, Inc. has offices in Bellevue, WA, Portland, OR, San Francisco, CA and Los Angeles, CA. Please visit the Rainier Group at www.rainiergroup.com or call at 1-800-800-8974.